Foreclosure Bill Is Blocked

Obama Plans His First Significant Veto Amid a Debacle Over Banks' Paperwork

By

Damian Paletta

Updated Oct. 8, 2010 12:01 a.m. ET

President Barack Obama plans to veto a bill whose opponents say would make it harder for homeowners to stop foreclosures.

The move marks the Obama administration's most direct intervention so far into a growing debacle tied to how banks foreclose on homes, and the first effective veto of Mr. Obama's presidency. The veto could make it more difficult for banks to complete paperwork and speed the foreclosure process, and could give homeowners more time to rework loans.

Several of the country's largest banks, including Bank of America Corp., J.P. Morgan Chase & Co. and Ally Bank, have moved in recent weeks to halt thousands of foreclosures in 23 states amid revelations that the banking industry had used "robo-signers," people who sign hundreds of documents a day without reviewing their contents.

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The mess, with its echoes of the lax lending standards that helped spark the financial crisis, comes just two months after Congress passed a sweeping law to crack down on the financial industry.

"We believe it is necessary to have further deliberations about the intended and unintended impact of this bill on consumer protections, including those for mortgages, because this bill can be finalized," White House communications director Dan Pfeiffer said in a blog post.

Mr. Obama will send the bill back to Congress using a process known as a "pocket veto." It is technically his second pocket veto, but the first of a bill the White House opposed. In December, Mr. Obama declined to sign a spending bill the White House said was "unnecessary" because Congress had passed superseding legislation.

The Obama administration and federal bank regulators have struggled to formulate a coordinated response to recent mortgage allegations, in part because they worry intervention might destabilize the fragile housing market or prolong the backlog of foreclosed homes that are holding down prices, people familiar with the matter said.

At least nine federal agencies have been involved in talks about the problems, which specifically relate to signatures on "foreclosure affidavits." So far, officials have mainly been trying to determine how many homeowners have been affected.

The issue is becoming a political football, with lawmakers making increasing demands for action. On Thursday, Rep. Edolphus Towns (D., N.Y.), chairman of the House oversight committee, became the latest lawmaker to call for a nationwide moratorium on foreclosures.

The vetoed bill, written by Rep. Robert Aderholt (R., Ala.), moved through Congress without attracting much attention and appears aimed at a much broader target than the foreclosure process. It would have required state and federal courts to accept documents of many different kinds that are notarized by people or computers in other states. The House passed the bill in April by "voice vote" and the Senate passed it unanimously Sept. 27.

But the bill caught the attention of Ohio Secretary of State Jennifer Brunner, a Democrat who has battled banks in her state over foreclosure procedures. She raised concerns with the White House earlier this week, she said in an interview, and sent an email to supporters asking for help getting the White House to block it.

The bill is called the Interstate Recognition of Notarizations Act of 2009 and was co-sponsored by Reps. Bruce Braley (D., Iowa), Michael Castle (R., Del.) and Artur Davis (D., Ala.).

"There is absolutely no connection whatsoever between [this bill] and the recent foreclosure-documentation problems," Mr. Aderholt said, adding that "the fears about this bill have resulted from misunderstanding."

ENLARGE

President Barack Obama plans to veto a bill whose opponents say would make it harder for homeowners to stop foreclosures. Above, President Obama makes remarks at the Community College Summit.
Reuters

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The bill raised difficult policy decisions for government officials. Some argued it ought to be easier for banks and others to process documents electronically to help reduce the backlog of foreclosures and aid the housing market's recovery.

A theme in this year's midterm elections, heard most insistently among tea-party activists, is Washington's dysfunction. One critique often cited is the way lawmakers often don't read or understand the legislation they approve. The bill being vetoed, HR 3808, passed the House and the Senate unanimously, and wasn't debated in either chamber.

"This may be a great opportunity for the House and the Senate to review their rules," said Ms. Brunner, adding that most constituents would have no idea whether their representatives either read or supported the measure.

The mortgage-servicing process is a regulatory gray area in which dozens of state and federal agencies play a small role but over which no one agency has primary responsibility. The new Bureau of Consumer Financial Protection, created by the financial-industry overhaul law in July, would have powers to act in this area, but it doesn't have its full authority until next summer.

Confusing the process, many state officials have intervened and ordered a freeze on foreclosures until the issue is resolved. Some Democrats also have called on the Justice Department, the Department of Housing and Urban Development, and Treasury Department to intervene.

Different States, Different Rules

Initiated by a lis pendens notice, sent after borrower misses a payment

Often delayed by state laws mandating mediation, or issues raised at trial

Ends when a judge sets a foreclosure sale and conveys the home to the bank

Non-judicial foreclosures

Handled between banks and borrowers

Initiated by a Notice of Default sent by the bank after borrower misses a payment

Can be delayed when borrower files for bankruptcy, or by state laws meant to extend the process

Ends when sheriff evicts homeowners, then sells the home at auction

One reason regulators haven't acted more forcefully, according to people familiar with the matter, is that some federal officials believe many people who lost their homes through the "robo- signing" process would have lost their homes anyway because they were behind on payments.

In Washington, a range of regulatory agencies have jurisdiction over the mortgage process. Many mortgage services are run as affiliates of large state or national banks, which are overseen by the Federal Deposit Insurance Corp. or Office of the Comptroller of the Currency. Their parent firms are regulated by the Federal Reserve.

Officials at the Department of Housing and Urban Development oversee mortgages backed by the Federal Housing Administration, and HUD officials are looking through those loans to see how many might be affected. Treasury Department officials are looking into the matter, but have little power to order private companies to change their practices. The Federal Housing Finance Agency, which runs Fannie Mae and Freddie Mac under a conservatorship, doesn't have jurisdiction to step in and scrutinize loans that aren't securitized or held by those companies.

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